More trouble at Freddie Mac - but it's stock goes up!
The WSJ reports that Freddie Mac continues to struggle. But it's losses were less than predicted. So it's stock went up.
Now a stock going up because the bad news wasn't as bad as predicted isn't unusual. But with Freddie, the situation stretches the usual logic. The reason the losses weren't so bad had to do simply with accounting changes that allowed Freddi to book some profits early and delay some losses. The losses are still there. They just didn't have to report them. Still the stock rose 9%.
If you want to know what it means to "speculate" in a stock, then just think about Freddie. You could have made money speculating on how the stock would react when the number were reported. For most of us, such speculation is a dangerous game to play.
But there's even more to this story. With all its trouble, the government is calling on Freddie to help dig out of the mortgage mess that started with the subprime abuses. The government wants Freddie to buy up mortgages issued by banks - to buy them up in ever greater numbers. Theoretically, this will keep the mortgage market liquid. And it would help encourage banks to continue lending mortgages to potential home buyers. And that would help to keep home prices from falling too far.
So the government's relying on an institution that has severe financial problems of its own to help save the housing market from too severe a drop.
If that's not a good example of what we mean by "house of cards," I don't know what is. But remember, a skilled person can set up a rather elaborate house of cards and keep it stable for a lot longer than you might imagine.
Now a stock going up because the bad news wasn't as bad as predicted isn't unusual. But with Freddie, the situation stretches the usual logic. The reason the losses weren't so bad had to do simply with accounting changes that allowed Freddi to book some profits early and delay some losses. The losses are still there. They just didn't have to report them. Still the stock rose 9%.
If you want to know what it means to "speculate" in a stock, then just think about Freddie. You could have made money speculating on how the stock would react when the number were reported. For most of us, such speculation is a dangerous game to play.
But there's even more to this story. With all its trouble, the government is calling on Freddie to help dig out of the mortgage mess that started with the subprime abuses. The government wants Freddie to buy up mortgages issued by banks - to buy them up in ever greater numbers. Theoretically, this will keep the mortgage market liquid. And it would help encourage banks to continue lending mortgages to potential home buyers. And that would help to keep home prices from falling too far.
So the government's relying on an institution that has severe financial problems of its own to help save the housing market from too severe a drop.
If that's not a good example of what we mean by "house of cards," I don't know what is. But remember, a skilled person can set up a rather elaborate house of cards and keep it stable for a lot longer than you might imagine.
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